In case you missed Finance Minister Tito Mboweni’s recent Budget Speech, we’ve scanned the media and delved behind the headlines to examine the tax impact on South Africans living and working abroad. Two important changes were announced by our National Treasury for South Africans living overseas.
Expat tax south Africa: What has changed for South Africans abroad?
The biggest thing for South Africans living overseas is:
- The proposed amendments to exchange control regulations that will see the practice of financial emigration (also known as “formal emigration”) through the South African Reserve Bank being phased out from March 2021 and
- The impact on South Africans working abroad, is the increase of the tax exemption cap on foreign remuneration earned as a South African tax resident that was increased from R1 million to R1.25 million as of 1 March 2020.
What exactly does it mean if financial emigration is going to be phased out? It’s not clear just yet, but it’s likely that the current exchange control process will be replaced by a new, more stringent tax verification process. However, you’ll still need a bank account in South Africa and you’ll still need to prove the source of funds and verify good tax standing before you’ll be able to encash any of your retirement annuity policies.
However, for now it’s still business as usual when it comes to financial emigration, and it’s still currently one of a handful of limited ways in which you can get your hands on retirement funds before the age of 55. What else did we learn from the Budget Speech? That what we’ve been saying about South African Expat Tax all along is in fact correct: financial emigration will not relieve a South African resident of their tax obligation, if they are still deemed a tax resident of South Africa.
Let’s take a look at the new South African tax law for expats, bearing in mind that these reforms are intended to give more flexibility to South Africans working abroad. They’re also intended to increase transparency in the system and reduce onerous and unnecessary administrative approvals. What is going to essentially happen is that exchange control structures for individuals will no longer be as stringent, but tax measures will tighten. This means that as long as funds are legitimately sourced and you’re square with SARS, you won’t have a problem. Should you wish to transfer more than R10 million abroad, you’ll be put through a serious verification process, that will entail a
- risk management test that will cover certification of tax status,
- acknowledgement of fund source and
- will require assurance that the person meets the anti-money laundering and countering terror financing measures as laid out in the Financial Intelligence Centre Act.
A future in which financial emigration is phased out
After 1 March 2021, it is expected that emigrants and residents (as long as they’re natural persons) will be treated the same for exchange control purposes. This means that the restrictions on emigrants in respect of credit, investments and being limited to the use of a Blocked Rand/Capital Account have been scrapped. As already mentioned, financial emigration through the South African Reserve Bank will be phased out and replaced by verification processes for tax purposes. For individuals, tax residency will still be determined by the ordinarily resident and physically present tests long mandated by the Income Tax Act.
Withdrawing retirement funds after financial emigration
As it stands, individuals can access and withdraw their retirement annuity funds or pension funds once they’ve completed the process of financial emigration through the South African Reserve Bank for exchange control purposes. The phasing out of financial emigration will mean that these triggers for pension/retirement fund withdrawal will need to be relooked by the legislature, but this is purely theoretical until 1 March 2021.
Until then, it’s business as usual. Should you be looking to cash in your retirement annuity funds or you’re considering shifting your pension funds abroad, financial emigration is still your only bet before 1 March 2021.
Long story short, the new South African tax law for expats:
- South African individuals will still have access to the Single Discretionary Allowance of R1 million for all purposes, including travel, gifts, investments and donations. The SDA limit is subject to review as required.
- Where individuals wish to use their foreign capital allowance for the purpose of investment (above R1 million and up to R10 million) they will not need prior exchange control approval, but they will be subject to tax compliance measures.
- South African individuals and emigrants will be treated equally under the proposed new system and the difference will come in the application of capital flow management measures.
- The purpose of the proposed new system is to place South African residents and emigrants on an equal footing, if their tax commitments have been fulfilled.
- Transferring more than R10 million abroad will see an individual being subjected to a strict verification process for tax purposes as well as a risk management test for capital flow purposes.
Which questions are hot on everyone’s lips right now after the 2020 Budget Speech?
If you’re a South African living and working abroad, these are some common issues that could possibly affect you:
- How do I know if I am a resident in South Africa for tax purposes? Take a look at the real world application of the ordinarily resident and physically present tests.
- What’s the difference between financial emigration and tax emigration? Take a look at the implications for exchange control and tax residency purposes.
- What is South African expat tax and do I have to pay it? Can I avoid expat tax by financial emigration?
- What do I need to know about exiting the South African tax system? What is the exit tax that is triggered by changing tax status from resident to non-resident?
Uncertain times call for a trusted financial services partner
Until our tax and exchange control authorities have provided clarity on their proposed amendments to their current systems, we should apply more caution than usual. It’s never a good idea to fall foul of tax and exchange control legislation, which is why it’s so important to choose a cross-border financial services provider that can also deliver peace of mind along with their services.
Introducing FinGlobal. The financial emigration specialists and cross-border financial services provider with all the right credentials.
Since 2009 we’ve dealt with thousands of clients on various aspects of their cross-border financial portfolios, and we’re ready to put our expertise and credentials to your service. We have a 100% success rate and you can rest assured everything we do is completely above board.
- We are a licensed Financial Services Provider (# 42872) with the South African Financial Sector Conduct Authority (FSCA). Click here for membership verification.
- We are registered with South Africa’s Financial Intelligence Centre (FIC).
- We are a licensed Treasury Outsourced Company with the South African Reserve Bank (SARB).
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Still got questions? Get started with your free, no-obligation financial emigration assessment today.